Lord Lester of Herne Hill: My Lords, can the noble Baroness the Leader of the House clarify one important matter? As I read paragraphs 19 and 20 of chapter 7, the relationship between the senior judiciary and this House as a legislature in respect of separation of powers is considered to be within the terms of reference of the Royal Commission. However, to make specific proposals as to some alternative final court is not within the terms of reference. Have I understood that correctly?

Baroness Jay of Paddington: Yes, my Lords.

Lord Weatherill: My Lords, I forbear to mention the arrangements the noble Baroness has made concerning the 91 hereditary Peers who are to remain as an interim measure. However, I pay tribute to the noble Viscount, Lord Cranborne, for his part in helping to bring that matter to fruition.

I have two brief questions. I have not had time to read the White Paper, which has only just been put into my hands. First, when will the commission to nominate independent Peers be set up? Secondly, is it within the remit of the Royal Commission to look at the number of Members of Parliament in the other place, bearing in mind devolution for Scotland and Wales?

Baroness Jay of Paddington: My Lords, the answer to the noble Lord's second question is simply no. I hope I have understood the question correctly. Composition of the membership of a reformed House

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of Lords is not related to the composition of the membership of the other place at all. The timing of the establishment of the appointments commission will depend on the passage of the stage one Bill through both Houses of Parliament. If it were to proceed smoothly, there is no reason why the appointments commission should not be set up in the course of this year.

Lord Gifford: My Lords, may I congratulate the noble Baroness the Leader of the House on a truly historic Statement which announces the end of an unjust privilege. As a hereditary Member, I and my few hereditary noble friends have always respected the Members of this House, the work of this House and the procedures of this House, but we have found the institution of the House to be profoundly unjust. I said so in my maiden speech in 1965.

Is consideration of the name of the new second Chamber within the terms of reference of the Royal Commission? Would it not symbolise the historic significance of the reform announced today if the new second Chamber were to be a House of Senators and not a House of Lords?

Baroness Jay of Paddington: My Lords, I am grateful to my noble friend for his remarks about the position of himself and, I am sure, other noble Lords who are hereditary Peers. As I have had the opportunity to say before in your Lordships' House, I have found in conversation with noble Lords on these Benches who are hereditary Peers that their approach is similar to that expressed by my noble friend. The question of the name of the reformed House is not in the terms of reference, although I am sure that the noble Lord, Lord Wakeham, and his colleagues may be inspired.

Lord Campbell of Alloway: My Lords, perhaps I may ask a very simple question. Can the noble Baroness the Leader of the House confirm that there will be no substantive enactment of reform until the Royal Commission has considered the matter? Can the noble Baroness also confirm that there will be no such reform until a joint Select Committee of both Houses has considered the report of the Royal Commission and the considerations of both bodies fully debated in this House and the opinion of the nation taken in a referendum? Can she further confirm that all representations as to the reform of the powers, constitution and composition of this House will be put to the Royal Commission?

Baroness Jay of Paddington: My Lords, as the noble Lord, Lord Wakeham, said, the Royal Commission obviously has within its terms of reference a very wide remit, together with an ability to take evidence and make judgments on a large number of issues. I imagine that the noble Lord, Lord Campbell of Croy--

Noble Lords: Alloway!

Baroness Jay of Paddington: My Lords, I apologise to both noble Lords. One is sitting in front of the other;

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I apologise to both. The noble Lord, Lord Campbell of Alloway, speaks of substantive reform. I suppose he is referring to the long-term reform of the House--what we call colloquially "the second stage". It is of course the case that the purpose of the Royal Commission is to advise us in that respect. So there is absolutely no suggestion that any change would be made before the Royal Commission reported.

Lord Monkswell: My Lords, although I welcome enthusiastically the Statement made by my noble friend, perhaps I may refer to the proposed amendment in the name of the noble Lord, Lord Weatherill. Would my noble friend consider consulting with her right honourable friend the Prime Minister as to whether it might be useful for that amendment to be considered on the basis of a free vote in both Houses? That would enable it to receive across-the-board endorsement rather than being perceived as a creature of the party political machinery.

Baroness Jay of Paddington: My Lords, my noble friend makes an interesting suggestion. I shall be happy to raise the matter with my right honourable friend. I am not quite sure precisely what my noble friend expects would happen in this House but to suggest that the Government could drive through anything on the basis of their massive majority in this House would be a little extraordinary.

Business of the House: Debate, 25th January

4.2 p.m.

Baroness Jay of Paddington: My Lords, I beg to move the first Motion standing in my name on the Order Paper.

Moved, That Standing Order 38 (Arrangement of the Order Paper) be dispensed with on Monday, 25th January to allow the Motion in the name of the Earl of Onslow to be taken immediately after proceedings on the Social Security Contributions (Transfer of Functions etc.) Bill [H.L.].--(Baroness Jay of Paddington.)

On Question, Motion agreed to.

Business of the House: Debate this Day

Baroness Jay of Paddington: My Lords, I beg to move the second Motion standing in my name on the Order Paper.

Moved, That the debate on the Motion in the name of the Lord Taverne set down for today shall be limited to five hours.--(Baroness Jay of Paddington.)

On Question, Motion agreed to.

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European Single Currency

4.3 p.m.

Lord Taverne rose to call attention to the significance for the British economy of the introduction of the euro, and to move for Papers.

The noble Lord said: My Lords, the launch of the euro is one of the most important world events since 1945. It means the creation of an economic bloc which is likely, in time, to rival the United States. It is already a bigger trading bloc than the United States and its total GDP is only slightly lower. Within the next 20 years, probably sooner rather than later, the euro may well become a currency which is as important as the dollar. Europe is also likely to develop a huge capital market as the cult of the equity takes root and as privately funded--

Baroness Farrington of Ribbleton: My Lords, I wonder whether I could respectfully ask those noble Lords who are in the process of leaving the Chamber to be a little quieter. It is proving impossible to hear the speech of the noble Lord, Lord Taverne.

Lord Taverne: My Lords, as I was saying, Europe is also likely to develop a huge capital market as more and more people take to the cult of the equity and as many states are forced to expand greatly their commitment to privately-funded pension schemes.

So I start with a proposition, which must surely be hard to contest, that the euro bloc will be an economic colossus. Next, our own economic future is intimately intertwined with the fortunes of the euro. The euro bloc is by far our largest trading partner. We share with it common laws about trade, competition and other economic activities. Moreover, most of our biggest companies are deeply integrated into the economic fabric of the single market. Therefore, the decision whether we should join this bloc, and, if so, when--or indeed, for that matter, whether we stay out--will have momentous consequences for this country.

Some argue that the prospects for the euro are uncertain, even bleak; that the British economy is not ready to join, or is not compatible with the economies of our European partners; or even, whatever the economic arguments, that joining would mean an unacceptable loss of sovereignty.

I do not contend that those arguments have no substance. They are the views of many eminent people whom I respect. But when we faced the choice as to whether we should become party to the Schuman Plan, when we faced the choice about whether we should join the common market when it started and when we faced the question of our relationship with the European monetary system, arguments were also advanced against joining at the start which seemed credible and reasonable at the time. Yet, in retrospect, most would now admit that those arguments were mistaken. That is especially true of our failure to join the common market at the start--a failure for which we paid a heavy price because we had to accept a common policy for agriculture and fisheries which was set and determined before we entered. As we delayed, the cost of entry rose.

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As Hugo Young points out in his excellent book, This Blessed Plot, in each case the pattern of argument is much the same. First: "It will never happen". Then: "It will never work". Then: "Even if it works, it is not good for us". Eventually we join, after the shape of new institutions or developments has been determined without our participation and without any regard to our special interests.

Is the pattern being repeated again, in this, perhaps the most important decision of all? I see that the noble Baroness, Lady Thatcher, has taken her place in the Chamber today. I recall that she said that EMU was impossible. She called it, "Cloud-cuckoo-land". Nearly all the sceptics told us that the euro would never happen, or that it could never start on time. Now they say that it will fail, or that it is not for us. One should perhaps treat with some caution the forecast of those whose forecasts have been proved wrong, wrong and wrong, time and again.

Of course EMU is a risky venture. No one can guarantee that it will succeed. But as with the Schuman Plan, the common market and the European monetary system, the sceptics under-rate one vital element: the importance of the political will of our European partners. It was political will that enabled EMU to start on time. It was political will that enabled Italy, Spain and Portugal to qualify against all the odds. Moreover, it is the undoubted political will of its members to make EMU succeed, which is the most persuasive reason for believing that it will succeed and that it will be a bloc of low inflation and financial stability.

It is most improbable, for instance, as some of the sceptics predict, that nations which made the most strenuous efforts to qualify will now suddenly go for reckless spending and high deficits. Sceptics also predict that the new swing to the left in Europe will undermine financial stability. It is therefore noteworthy that both Oskar Lafontaine and Dominique Strauss-Kahn do not believe that you can create jobs by deficit spending. They have made it clear that they prefer the Clinton-Greenspan mix of tight fiscal policy and a looser monetary policy to the Reagan-Volcker mix of high deficits and high interest rates.

Further, with the new transparency of prices within EMU competition inside the euro bloc will be intense. This will be a powerful force for liberalisation and a powerful spur to future prosperity.

But even if the euro is likely to be a success, it is still argued that it does not suit us, that the risks are too great. Of course there are risks if we join, much the same risks incidentally as there are for Ireland, Spain and Portugal. However, they decided to join and take the risks, and for good reason because there are great rewards to be won which outweigh the risks: a stable currency, the prospect of lasting low inflation and low interest rates, increased investment and, above all, the prospect of influencing the future of EMU.

There is a curious lack of national self-confidence among the sceptics. They assume that the odds will always be stacked against us. That is a pessimism which is in no way justified by experience. Our economy may make up some one-eighth of the total of the Union's

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GDP, but our influence inside the Union has been disproportionate. Whenever we have played an active and constructive part, the Union has developed in ways we can applaud. Thanks, among others, to the noble Baroness, Lady Thatcher, we made a major contribution to the start and the development of the single market. We have been on the winning side in the crucial battles for world free trade, budget reform and enlargement. Thanks to qualified majority voting we have secured some reform of the agricultural policy, and the prospects for more radical reform of the agricultural policy are now better than they have been previously. If we were part of EMU we could be confident that our voice would be powerful and that it would be effective.

On the other hand, what happens if we stay out? The pound outside the euro bloc will be highly vulnerable. The launch of the world's second largest currency in the middle of our largest trading area is bound to put strains on the pound, especially if the relationship between the euro and the dollar is volatile, as it may well be in the early years. Our industry will face costs which its competitors will be spared. Meanwhile integration inside EMU is likely to accelerate.

I agree with the sceptics that the euro has profound political implications, although, unlike them, I do not know exactly what forms these will take. No doubt there will be--indeed there already has been--much talk of a move to more federalism. I suspect, on past experience, that the rhetoric will be more evident than the reality. In any event those who call themselves federalists in Europe favour a decentralised Europe, a long way removed from the monster centralised European superstate with which sceptics frighten the children. I think they would find few Frenchmen, for instance, who would tolerate a European superstate which stopped the French from living their own lives.

There will be, I suspect, more qualified majority voting agreed among the 11. So far qualified majority voting has worked very much in our favour. But of course if we stay out, its extension among the 11 would not take account of any special interests that we may have. There may well be more tax co-ordination and tax harmonisation among the 11. I am at present rather doubtful whether this will happen. I am doubtful whether it is necessary. I certainly regard the technical obstacles as formidable, particularly in the field of corporation tax and particularly as regards the structure of taxation.

There will almost certainly be pressure for more accountability and democracy. However welcome this will be, clearly we have the strongest interest in having a say in the changes in institutions and procedures which might come about. Surely the vital point is that the form of integration, the future shape of euroland, would be decided without us if we stayed out. The "euro-X committee" will increasingly take the economic decisions that matter inside the Union. If we stay outside, we shall have observer status only. The essence of our sovereignty, the power to control our own future, will be substantially diminished if we stay out, and enhanced if we join.

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I believe that the Government realise the dangers of isolation. They do not want Britain to be left as an observer on the fringes of the euro bloc. However, their policy so far has been timid and equivocal, very much in the traditional mould of British policy towards Europe. Of course there are good prima facie reasons for caution. Our economic cycle is somewhat out of whack and we are not yet sufficiently convergent. We all know the arguments. But convergence will not come about by accident. We could well converge by accident, perhaps early in the next century as we come out of recession or a slow down, and then we could pass like ships in the night. Real convergence means following an active policy to achieve convergence, as Spain, Italy and Portugal did to qualify for membership. They did not join only when they converged. They converged because they were determined to join. The way to achieve convergence is to announce our intention to join by a certain date as soon as possible. Setting a date will enable markets to adjust, as they did with the other EMU states. The declared intent would become a self-fulfilling prophecy.

However, a policy of continued prevarication without a firm commitment, whatever the many expressions of good will, is a dangerous policy, especially if doubts grow about our eventual commitment. The pound will be vulnerable for the reasons stated. Our long-term interest rates would almost certainly be higher. Our economy would suffer and with it the standing of the Government. The chance of winning a referendum would be correspondingly prejudiced. What is more, it is likely that the eventual price of entry will go up, as it has done before.

In time as EMU grows more close knit, some might well become less enthusiastic about having us in, especially if we have periods of what some might regard as "uncompetitive devaluation". We may well be required, as a price of entry, to abandon our budget rebate. We may well be required to join formally in a narrow band of the new ERM for two years before entry. That is all possible.

Meanwhile the position of the City as the financial centre and capital of Europe would begin to erode. No doubt its present status can survive if the markets expect that we shall join EMU soon, but it would be unlikely to survive if we stay out for long, or if markets take the view that our membership can be indefinitely delayed.

It is not perhaps surprising that in a recent opinion poll only 5 per cent. of opinion in the City agreed with the policy advocated by Mr. Hague. Indeed what is the real alternative to joining? This brings me briefly to examine the view that you can somehow be pro-European Union but anti-EMU. Some 10 years ago that might have been a tenable proposition; today it is not. EMU is now the core of the European Union. It is likely that Denmark will decide to join perhaps next year or the year after. Even Sweden, it now seems, is likely to follow. In both countries opinion has changed dramatically since the advent of the euro. Greece, as the Financial Times put it yesterday, is racing to qualify.

Therefore there is a real possibility that we shall in time be left on our own, isolated, a second-class member of the European Union, cut off from what the rest regard

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as the Union's central project. We and they would move in opposite directions, growing further and further apart. Then we might well find that the existing advantages of the single market begin to fray.

Some sceptics offer a clear alternative. They want us to abandon the Union altogether. That is the clear aim of the noble Lord, Lord Shore, who has been against the Union almost as long as I have been for it. It also seems to be the present aim, more recently adopted, of the former Chancellor, the noble Lord, Lord Lamont, to whose maiden speech we very much look forward. I believe there is a certain logic in that view. I would regard our exit from the European Union as deeply damaging for economic and political reasons. But, in a way, to be out makes more sense and may make for easier relationships with our fellow Europeans than to be half in, half out, perpetually seeking to stop our European Union partners from doing what they want.

In my view the choice is clear. We should join this great venture of world importance as soon as we can. If I am right, we need a lead from the Government and we need it now. The Government are popular and I think mostly--with some reservations--deservedly so. But they will not be so popular forever. Now is the time for the Prime Minister to speak out bold and clear. If he does, I have little doubt that the people will respond and, as in 1975, the referendum will result in a resounding "yes". My Lords, I beg to move for Papers.

4.20 p.m.

Lord Grenfell: My Lords, I rise to express my very deep thanks to the noble Lord, Lord Taverne, for introducing this debate. His consistent and rigorously argued support of the idea of a single currency has commanded my respect over a very long period of time. Like him, I look forward to hearing the maiden speech of the noble Lord, Lord Lamont of Lerwick. I share the profound satisfaction of the noble Lord, Lord Taverne, at the successful launching of the euro. I welcome it as wholeheartedly as did the noble Lord, Lord Cobbold, in his very spirited letter to The Times.

This is certainly a unique and momentous event in Europe's history. It marks not, as the eurosceptics would have it, the end of a Europe with which Britain can live, but the beginning of a Europe which can live better with itself, Britain included, and with the rest of the world.

We chose not to join the single currency in the first wave on the ground that our position in the economic cycle was too distant from that of the continental economies to make convergence possible within the timeframe. We were also waiting for some hard evidence that joining would be in our economic interest. The caveat on convergence was not unreasonable, but the caveat on entering before our economic interest was established was always, in my view, somewhat questionable. How long would it take before the Treasury could declare on the evidence of the single currency's performance that it was safe to join? Our economies might already be diverging again by the time that proof was established--passing as ships in the night, as the noble Lord, Lord Taverne, put it. I can

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only hope that when our economy does come close to convergence, the Government will make that leap of faith which eleven other countries were prepared to do when they joined in the first wave.

In light of what we have been hearing from Ministers in recent days, I do not doubt that the Government favour our eventual entry; the "if" has given way to the "when". I look forward to the publication of the Treasury's national changeover plan and hope that our experience of dealing with the euro as an outsider will permit the period between a referendum giving the green light to become an insider and the actual introduction of notes and coins to be much closer to three years than four.

We are committed to a referendum, but I have difficulty in seeing the setting of a target date for entry as incompatible with that democratic process. The final word still remains with the people, but in the meantime, an unambiguous declaration of government intent, supported by a target date, would greatly assist business, industry and the financial sector, not only in their own preparations, but in the conduct of their affairs with countries already in the eurozone.

The problems and disadvantages facing Britain as a non-member of the eurozone are, in my opinion, mostly manageable, provided that there is a firm expectation within the EU membership that we will eventually join. Undermine that expectation--as the Conservative Opposition's official policy undoubtedly would--and our situation as an "out" would be that much more difficult. The importance of maintaining a stable sterling/euro exchange rate cannot be underestimated in light of our trading relationship with our European partners. If the currency markets believe that Britain will go into the eurozone, sterling should move gradually towards the rate at which markets expect it to be tied to the euro, thus avoiding the kind of volatility that might be expected in the absence of such expectations.

The single currency is now a fact of life, and only those who dislike it in principle will not want to see it succeed in practice. But this does not mean that those of us who wish it well do not see problems ahead. For example, there are fears that excessive appreciation of the euro against the dollar could slow economic growth and increase unemployment among the Eleven. Herr Lafontaine has, happily, retreated from his position that this calls for explicit exchange rate target zones in the face of strong opposition from ECB President Duisenberg and US Federal Reserve Chairman Greenspan, who see such global target zones as muddled in principle and unworkable in practice. The European Central Bank is insisting, however, that it will not follow a policy of benign neglect towards the exchange rate, which will remain one of several indicators influencing its monetary policy. That is surely right. The concerns of Messrs. Lafontaine, Strauss-Khan and others--and now also of the Japanese--can surely be met through the timely intervention of central banks as and when strong appreciations or depreciations need to be counteracted.

The lopsided structure of fiscal and monetary policy under the Maastricht Treaty is another immediate concern, as your Lordships' European Select Committee

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pointed out in its recent report. There is always the danger that the rules of the stability and growth pact relating to fiscal deficits will prove too tight. The problem is an immediate one, given continuing signs of significant economic slowdown in the eurozone, with estimates of only 2.4 per cent. growth in the last quarter of 1998. Under the pact's very tough rules, there are circumstances in which even the most modest countercyclical fiscal policy could not be implemented unless sufficient headroom had not already been created by higher taxes and lower expenditure.

That that is incompatible with slow growth and rising unemployment is blindingly obvious. The solution surely lies in the revision of the stability and growth pact to allow governments a more flexible fiscal response to particular economic circumstances, provided that over the economic cycle as a whole a mandated average level of budget deficit is respected. I see no reason why agreement to amend the Maastricht Treaty to accommodate that change cannot be reached. But there will be little or no gain from such a change if governments for their parts fail to implement the supply-side reforms necessary to ensure more flexible labour, product and financial markets.

I am not one of those who believe that the European Central Bank is hell-bent on imposing a permanent deflationary bias on the eurozone in its pursuit of price stability. Its co-ordination of the concerted interest rate cut by the eleven cental banks on 3rd December suggests it is capable of a more flexible, politically sensitive approach than its strict price stability strategy might otherwise call for. But the corollary surely is that governments must co-operate more closely over national economic policies in general, and fiscal policies in particular, if the relationship between the ECB and national governments is to work meaningfully and effectively for the Union as a whole.

That brings me finally to a crucial question for Britain. Are we clear about where the Union is headed? We ought to be by now. The introduction of the euro is a potent spur to further economic integration, measured in growing trade and investment in the euro area. What will naturally follow from this is closer economic policy co-ordination as the countries of the eurozone become more interdependent. But integration does not mean centralisation; it does not mean a single state; it does not mean a single tax rate, as eurosceptics would have you believe. The right to pursue national interests within the parameters of the co-operative endeavour which is the European Union is as strong in Paris and Bonn as it is in London and Stockholm. France has its own national interest in mind in resisting co-financing of agricultural subsidies; Germany has its own national agenda when it calls for more tax co-ordination.

But let us be very clear on one point. Economic integration was never meant to be an end in itself. It is the necessary first step towards deeper political integration. If Britain does not have the stomach for that, then it is better that it remains outside. Personally, I welcome deeper political integration. If the new eurozone is to be a great economic power--or a Colossus, as the noble Lord, Lord Taverne, put it--as I believe it will be, then coherence in its policies is a

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sine qua non. That does not mean stifling competition among states; it means setting sensible, equitable ground-rules. For the great challenge facing the European Union, now that economic and monetary union has arrived, is the democratisation of its structures and institutions. Martin Wolf put it starkly in a recent commentary in the Financial Times:

"European integration has, in short been a benevolent elite plot in which a cartel of executives has operated alongside unelected bureaucrats to secure the economic integration of the continent. But what has by now emerged is a proto-federation without many of the requirements of a democracy".

So that is the real challenge: the democratisation of the European Union. Can we turn it into a true democracy which retains its internal diversity, competition among states, and individual cultural identities? That was the vision of the founding fathers, and monetary union has now brought us to the point where a rigorous process of democratisation must be launched or the whole project will surely fail. There are those who wish it to fail. I am not among them. I dearly want it to succeed, and I hope that our country, our people and our Government will recognise how much Britain has to offer to that endeavour and how much we have to gain by its fulfilment.

4.30 p.m.

Lord Skidelsky: My Lords, we are grateful to the noble Lord, Lord Taverne, for giving us an early opportunity to discuss the launch of the single currency. Whatever our views on whether or when Britain should join euroland, we can agree that the arrival of the euro is a momentous event in European history. We can also agree that it will have important implications for our economy and for the conduct of our economic policy, some of which were pointed out in a characteristically informed and attractive speech by the mover of the Motion, although I must say that it reminded me slightly of those arguments for restoring the gold standard in 1925 when it was said that all Britain had to do was to fix a date and a price and everything in the economy would adjust accordingly.

The line-up of speakers for this debate is a testament to the intellectual and practical knowledge commanded by this House. In particular, we all look forward in lively anticipation to the maiden speech of the noble Lord, Lord Lamont of Lerwick.

I turn to the Conservative case for excluding entry into the single currency until the end of the next parliament. It rests on an assessment of both the economic and the political consequences of monetary union. We believe that monetary union will lead inevitably to fiscal union and then to political union. We do not want Britain to be part of a United States of Europe and we do not believe that the British people do either. I do not think we are wrong about those political consequences. Leading European politicians have repeatedly emphasised that monetary union is a staging post to full political union. Eight years or so--who knows?--but certainly a longish period of time should give us a much better idea of whether we are right about the political and economic dynamics of monetary integration.

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We believe that it is wrong to hold a referendum on joining the euro before the political as well as the economic implications are much clearer than they now are. We do not want the people of this country to turn on the politicians--politicians of any party--and say, "But you never told us that joining the euro meant signing up to membership of a new European state". We believe that a referendum, if and when it comes, should be held in the light of all the relevant facts--and they are not all in yet. Meanwhile, no British government should feel forced to take policy decisions on taxes or on currency matters which pre-suppose that we will enter euroland in two or three years' time; yet that is clearly implied by the present Government's decision to prepare for entry. We on these Benches will never tire of repeating that Europe is a choice, not a destiny, and we must never knowingly put at risk our freedom to choose.

Of course, I do not deny that the emergence of the euro will change life in Britain. It will confront businesses and consumers with a new set of facts to which they will have to adjust. Consumers and firms will benefit from having many of the prices of the goods and supplies that they buy quoted in a single currency. That will reduce inter-European Union price differentials; for example, the price of cars should fall to the lowest euro price quoted in the single market. Firms will be forced to price competitively. That, after all, is what the single market is all about. But none of this requires us to join a single currency.

It is argued, however, that some of the price differentials are due not to lack of price transparency but to differential sales taxes--hence the move to harmonise VAT. There is a theoretical case for harmonising VAT on tradables, whether the tax is levied at point of sale, as is true now, or at source, as the Commission proposes. But in thinking about harmonisation it is vital to bear in mind that the European Union is not the only place in the world in which to invest. If European Union corporate taxes are harmonised at, let us say, Germany's 56 per cent. tax rate, one may well get a flight of production to more business-friendly locations, such as the United States or central Europe. That means a flight from Britain.

Another problem arises from the unlimited demand for equal taxes made by so many European politicians. It is not just that they want to harmonise something here and there which might make the single market work a little better; they want to harmonise the whole range. We are opposed to using tax policies which might conceivably make a single market work better as a stalking horse for qualified majority voting and other moves towards political integration. We must insist on preserving a tax system which suits the customs of our people and the needs of our businesses, always remembering that approximately 50 per cent. of that business is done outside Europe.

We have been fed a great deal of alarmist stuff: that if we fail to join the euro soon, the City of London will lose its status as the world's leading financial centre and business will emigrate to Frankfurt. I do not believe that to be true for a moment. The view of the British Bankers' Association is that the euro would be a

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challenge to the City of London, but that is only to say that the City operates in a competitive international environment--it always has and it always will. What keeps it pre-eminent are a critical mass of financial institutions, an abundance of skilled workers and a sound regulatory system. London possesses those attributes regardless of the dominant currency, which is currently the dollar. What all experts do agree on is that the City's position will be threatened by the Commission's proposal to levy a withholding tax. That is a tax levied on the interest and dividends received by a foreign investor. It would raise the cost of financing bond issues in London. There would be every incentive, therefore, for international lending and bond-issuing business to move to financial centres where there is no withholding tax, such as Switzerland and various off-shore islands. Of course the Commission wants to stamp out tax evasion. That is perfectly right. No one wants profits to be based on providing safe havens for tax dodgers. But there will be no gain in tax collection if businesses move out of the European Union altogether. The Government say that they are against the withholding tax. But are they prepared to stand up for the interests of the City? We look for deeds, not words.

The last and most serious topic I want to address is the impact of the euro on our currency. The crucial point is that, if Britain intends to join the euro soon, the Government will have to decide very quickly at what rate they want to fix the pound to the euro. But it is surely inappropriate to make a decision of that kind until we have a much clearer idea of what the euro's long-term relationship with the dollar is likely to be. The main reason is that half of Britain's trade is with non-European Union countries and is denominated in dollars, a fact to which the noble Lord, Lord Grenfell, did not refer. That makes the pound/dollar exchange rate as important for British traders as the pound/euro rate. In the hyperbolic press comments which greeted the advent of the euro it was somehow assumed that all Britain's trade is with the European Union. In fact, a much higher percentage is with non-EU countries than is true of the average European Union member. Britain has always been a global trading nation, dependent on world economic links and conditions and not merely European ones.

It is widely expected that the euro will appreciate against the dollar, not just because of temporary euphoria but also because the rest of the world will no longer have to finance America's 300 billion dollar current account deficit. Countries will have the choice of holding euros or dollars. If we fix the euro/sterling rate now, we run the fundamental risk of sterling being misaligned with the dollar; our trade with "dollarland" will suffer, and we may well be forced into another ERM-style fiasco. In short, the gains from fixing the rate now are relatively small, but the risks are very great. Fixing to the euro now would also make a nonsense of the Bank of England's price mandate. Money supply and prices would be hostage to the fluctuations between the euro and the dollar.

I wish to put some specific questions. Is it the Government's intention to join the euro in the next two or three years? Will they agree that in order to prepare

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for joining they must have a currency policy? Do the Government have a currency policy? What do they think the relationship will be between that currency policy and the inflation target mandate that the Chancellor has only recently given to the Bank of England? Those are serious questions, and they will not go away. We have eminently sound reasons for waiting to see what are the politics and economics of monetary integration. I trust that this debate will give the Government an opportunity to disclose their intentions more fully than they have done so far.

4.41 p.m.

Lord Cobbold: My Lords, it is indeed right that this House should have the opportunity of debating the euro during the first month of its existence. Therefore, I too thank the noble Lord, Lord Taverne, for raising the subject today. I also very much look forward to the maiden speech of the noble Lord opposite which we shall hear shortly.

It is difficult to overstate the importance of the euro to the British, European, and indeed global economy. The launch of a single currency by 11 European states is, as the noble Lord, Lord Taverne, has already said, an important and unprecedented event in world terms. It is probably the most important event in Europe since the Treaty of Rome. Coming at the end of a century--indeed, at the end of a millennium--during which the tribes of Europe have been locked in almost continuous mortal conflict, it is a bright light for peace and economic progress--and, let us hope, a pointer towards a more mature mode of cohabitation for the peoples of Europe in the third millennium.

Sadly, we the British did not have the confidence or the courage to join the venture. Today, we are focusing on the significance to the British economy of that decision.

The most obvious potential impact is on the City of London and our financial services industry. The City, together with the Bank of England, has played a very important and positive role in the implementation of the euro and in the detailed arrangements for payments and contracts.

The City is confident that it can retain its pre-eminence. But there has certainly been a considerable upsurge in competition from Frankfurt and Paris; and there must be some risk of erosion of the City's dominance of certain markets. We have seen some of this in the derivatives markets, where London has lost its preference for a London-based reference rate, LIBOR, in favour of the euro rival, EURIBOR. As stated in today's Financial Times, the London derivatives exchange (LIFFE) is fighting back and is changing its contracts to a EURIBOR base to regain the business.

The Stock Exchange is struggling to find a new role in the euro markets. Competition is fierce and we shall see many changes in the months to come.

The UK retail banks are perhaps the most obvious cases of potential competitive disadvantage. Unlike their counterparts in euroland, the British banks cannot use the strength of their domestic deposit base to compete

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throughout the euro area. However, on the whole, I think the City is right to be confident, although its worst enemy is complacency.

The most significant impact on the British economy of the euro is the one that is most difficult to assess. Those who are against our joining the euro claim that, by staying out, we retain control of our monetary destiny and have the freedom and flexibility to adjust monetary policy to suit our specific needs. But just how much freedom can we expect to have in the increasingly global economy? We are a sophisticated but small economy, suspended between two economic giants with whom we have to trade to live. About 40 per cent. of our economy is exposed to foreign trade, compared with around 10 per cent. for both the US and euroland. In other words, they will not have to worry about us, but we shall most certainly have to pay attention to them.

To prove ourselves and to remain attractive to inward investment, we shall have to be stricter than strict. We shall have to perform as well as, or better than, our giant neighbours in achieving stable growth. Given that sterling, although small in comparison with the euro and the dollar, is still a trading currency with an open and relatively deep market, we shall have to persuade the currency speculators of our good intent if sterling is to avoid becoming the plaything of the world's currency hedge funds.

To be successful, it seems inevitable that we shall have to pay a risk premium on our interest rates. Short-term three-month sterling interest rates are currently 2½ per cent. higher than those for the euro; 10-year government bonds are about 5/8 per cent. higher. How those differentials evolve in the future is critical in assessing the price that the British economy will have to pay--the price of freedom, one might say.

But let us not be pessimistic. It is a fact of life that we have not joined the euro. Whether we like it or not, the next two or three years will demonstrate to the world and to ourselves whether we can survive profitably on our own. We shall also see how the euro works in practice and whether it will produce the benefits that are claimed for it.

We should, of course, maintain a public policy of wanting to join, as indeed the Government have so far stated. If, by the end of this Parliament, the euro has led to a resurgence of growth and employment, to booming equity and bond markets in a massively expanding capital market, to industrial rationalisation and a thriving small business sector--and if we in Britain have had to pay a significant risk premium on our interest rates and have begun to see foreign investment passing us by in favour of euroland--the euro will sell itself to the British people. Indeed, it must sell itself to them if we are ever to have a realistic chance of joining. There is not much point at present in mounting an expensive propaganda campaign to try to persuade the British people of the importance of the euro. For some time to come, it will hardly touch their lives. Of course, it will affect business, but business is well capable of managing its affairs.

If none of those things happen, the Euro-sceptics will be triumphant. No doubt the Tories will be on the rampage again and little Britannia will feel very pleased

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with herself. I do not believe that that is very likely. I think we shall find it very difficult to steer our little ship through all weathers.

I believe that we shall find ourselves knocking at the door of euroland--and at that point we shall face a new set of problems. Will the price of entry have gone up? Shall we have to sacrifice the hard-won rebate of the noble Baroness, Lady Thatcher? Shall we have to spend two years' apprenticeship in the new ERM? Shall we or the markets be able to agree a sterling/euro entry rate that is acceptable to both sides?

I repeat what I said earlier: the euro is a step towards a more mature mode of cohabitation for the European peoples than the bloodthirsty rivalry of the past. We should therefore wish it well. But it does raise political questions as to how Europe is to organise and manage itself in the next century. It highlights the weaknesses and the democratic deficit of existing structures and institutions.

Europe will require visionary political leadership in the century to come. There is a need for institutional reform--that is perhaps even more important than the reform of your Lordships' House--but that is a subject for another day.

4.49 p.m.

Lord Lamont of Lerwick: My Lords, I am grateful for the opportunity to address your Lordships' House for the first time. It is very nearly 27 years since I made my maiden speech in the House of Commons on the Third Reading of the European Communities Bill. It must have been a terrible speech indeed because it has been both quoted and extravagantly praised in Sir Edward Heath's autobiography. I shall try to do better this time, although I am sure that some of my noble friends will prefer the first speech to the second.

The noble Lord, Lord Taverne, has drawn our attention to the launch of the euro. The fact that the euro has been launched and has existed for 20 days without accident tells us little except that certain European politicians have shown great determination and great willpower in pressing ahead, sometimes even ignoring public opinion in their own countries.

The noble Lord, Lord Taverne, placed great emphasis on influence. When I hear the word "influence", to misquote Marshal Goering, I sometimes feel like reaching for a gun. "Influence" is the word that has been used again and again to justify every step towards European integration that otherwise did not have immediate attraction. Giving up the right to set our own interest rates in exchange for a one-in-11 opportunity to set the interest rates of the euro does not seem to me to be the bargain of the century.

The euro will have influence on us, but we are not without consequence for euroland. Britain is euroland's biggest customer--bigger than the USA and Japan put together. We affect them, too.

Some supporters of the euro believe that its continuation for a few years will make it inevitable that the British people will conclude that we have to join the euro. However, it may work the other way round, when

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in a few years' time we discover that the world has not come to an end and that we have continued to prosper, even though we have not joined the euro.

Some British companies will use the euro as some today use the dollar. Perhaps British companies will have the best of all worlds: they can use the euro in the market of euroland and at the same time be based in a country which is able to devise its interest rates for its own economic conditions.

We are often told that euroland will give us lower interest rates. As the Russians put it, "There is no free cheese except in a mousetrap". There is no guarantee that euroland's interest rates will always be lower than ours. Currencies get the interest rates they deserve. Sterling will earn its interest rates as the newly independent Bank of England gains credibility--and I wholly applaud the decision of the Government to give independence to the Bank of England.

One day we may have interest rates suitable for a really good currency, where 10-year money costs well under 3 per cent. I am not referring, of course, to euroland, but to Switzerland. There is no interest rate premium there. That is a country outside the ERM, outside the European Union, not intending to join the single currency and which sets its own interest rates for its own economic conditions--and has achieved a very low level of interest rate.

What matters more than anything else is not getting the lowest rate of interest regardless of economic conditions, but getting the right interest rate. The euro will be accompanied by a single rate of interest calculated by an assessment of some average of the different conditions in the different countries of euroland. I have no doubt that it will be a strong currency and that it will produce a low rate of inflation--that is, measured on an average basis, with some countries above and some below. But for most of the countries, most of the time, judged from their viewpoint, the rate of interest will be wrong for them most of the time.

In recent years there has been a remarkable convergence of inflation as the different countries of Europe have prepared for the arrival of the single currency. But let us not forget that that convergence was achieved by divergent means: by different rates of interest. To achieve the same rate of inflation as Germany, Italy had to have much higher interest rates than Germany.

The imposition of a single interest rate across euroland will recreate different rates of inflation again. Differences between national economies will become accentuated. In inflation-prone countries, inflation will rise and, in the weaker economies, recessions may last longer. Instability, rather than stability, is likely to be the outcome. Because of its dependence on, and sensitivity to, short-term interest rates, Britain is more likely than any other country in Europe to suffer from that instability. I believe that the Pennant-Rea Committee estimated that if Britain were in the single currency, something like 40 per cent. of the effect of interest rate changes in euroland would be felt by the British economy.

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Professor Feldstein of Harvard University has somewhat provocatively observed that he believes that the euro will increase the risk of war in Europe. Even by my standards that would be going a bit far! His underlying point is that the euro will increase tension and friction between individual countries because they will have incompatible and irreconcilable expectations from common institutions.

I know that a maiden speech should be non-controversial. I can join the noble Lord, Lord Taverne, in welcoming the euro because its launch has been accompanied by a mass of declarations making it abundantly clear, to anyone in this country who did not know, what the euro was designed to achieve. Mr. Lafontaine, Mr. Fischer and the Chancellor of the German Republic have all reminded us that the purpose of the euro is to bring political union further forward.

The British Government are alone in maintaining that economic and monetary union is solely a question of economics. I want to be fair to the Prime Minister. His exact formulation is that there is no overriding constitutional bar to joining the single currency. But that does not take us very far. There is no overriding constitutional bar to ending Britain's independence. It is time to be franker about what the single currency is about and what it is intended to achieve.

I should like to address the points made by the noble Lord, Lord Grenfell, and touched on by the noble Lord, Lord Cobbold, about the political future of Europe. I do not believe that British institutions are incapable of improvement; but, if we are to transfer more power to other institutions, we ought at least to satisfy ourselves that they are better or that Britain will be better governed as a result. It is difficult to abandon the nation state because the nation state is inextricably linked with democracy.

Last night William Hague, the Leader of the Opposition, quoted from the book by David Landes, Wealth and Poverty of Nations, in which he describes the advantages that Britain has had because of always being a nation:

"A nation [is] not simply the realm of a ruler, not simply a political entity" [like the single market but] a self-conscious, self-aware unit, characterised by common identity and loyalty and equality of civil status".

That is the basis on which a minority accepts the decisions of a majority in a democracy. Europe is not a nation. A nation is not created by handing out free plastic blue and yellow flags to 1,000 people on 1st January in front of the Charlemagne building. That is not a European risorgimento; it is a PR stunt.

Europe, I fear, will never be democratic because it is not a nation. Where there is no democracy, there is no accountability; and where there is no accountability, there are the kinds of problems that, tragically, the European Parliament refused to confront last week. The issue is not whether political union, which will follow from monetary union, will work for Britain--it will not; it is whether it can ever work for Europe.

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4.59 p.m.

Lord Barnett: My Lords, I am delighted to have the opportunity to congratulate the noble Lord, Lord Lamont of Lerwick. I must confess that I had wondered how he would make what is usually described as a non-controversial maiden speech on the subject of the euro. I suppose one can define his speech by saying that it was non-controversial to those who agree with him. He will be interested to know that my noble friend Lord Shore of Stepney was nodding his head throughout. He would not expect me to agree with everything that he said. I agree with him on at least one point: the independence of the Bank of England and support for the Chancellor in that respect. I very much agree with that.

I warmly congratulate the noble Lord on his delivery and the way that he expressed sincerely held views on the topic. It is right that your Lordships' House should hear sincerely held views on both sides of the argument. I am sure that I do not have to convert noble Lords here today to the view that the noble Lord, Lord Lamont, will be heard with great interest in the future on this and other topics. I for my part very much look forward to hearing him again on many occasions in the future.

The case that is usually made against the euro--to some extent by the noble Lord, Lord Lamont, but certainly by the noble Lord, Lord Skidelsky, from the Opposition Front Bench--is not just that we should not join within seven or 10 years. If one analyses it the case that they make is that we should never join. It would be better and more honest if they admitted it. The fact is that any scare story will do to make a case against the UK joining the euro, for example tax harmonisation and the fact that not only the UK but Sweden, Denmark, Spain and many others will oppose tax harmonisation that requires unanimity to achieve it. It is a nonsense to use scare stories of that description. I am glad to see that my noble friend Lord Shore shakes his head. There are certain aspects of tax harmonisation that would be very much in the UK's interest, for example the question of tax avoidance and unfair tax subsidies. It must be in our interests not only to talk about it but to seek to do something about it.

I do not have an obsession about joining. I recognise that there are real risks in the UK being a member of euro and the euro itself. We said so in our report on the European Central Bank where we recognised that the euro might fail. That is certainly a fact that needs to be considered. My noble friend Lord Grenfell mentioned some of the areas where this was a possibility. I shall not repeat them. Fiscal profligacy and excessive budget deficits are certainly possibilities given that member states have tried so hard to become members of euroland. There is also the failure to make the essential structural changes that will be needed. That is certainly a risk which may or may not arise. It will certainly take some time. However, these structural changes will be needed whether we or any other member state is in. Therefore, in our report on the European Central Bank we recognised the risks. We said:

"We do not expect it to be allowed to fail".

My noble friend Lord McIntosh regarded that as a feeble response. I hope that he will go even further in his response tonight. We could have said that it would not

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fail. However, I do not wish to be as dogmatic as that. In the summing-up of the unanimous report of the Select Committee it is said that given the present position it is not likely to fail. We already see that that is likely to be the case.

But if there are real risks to the UK inside the euro there are very considerable risks outside it. There is serious danger, despite the comment of the noble Lord, Lord Skidelsky--this matter was dealt with to an extent by the noble Lord, Lord Cobbold, in his excellent speech--to the banking system and the City of London in particular. At the last count the number of UK and foreign banks was 553. In Frankfurt the number is 194. Can anyone really doubt that if we did not make clear fairly soon that we would be joining the euro that position would not change and some of the foreign banks in London at the moment would not at least contemplate moving? Of course that would happen. (I hope that my noble friend does not mind. I am afraid that I have only nine minutes in which to speak. I shall interrupt him later!)

The same applies to inward investment. We have experienced excellent growth in net inward investment over the past 10 years. For example, in 1988 it amounted to £12 billion; in 1997 it was £22 billion; and in the first three-quarters of 1998 it was £32.8 billion. Can anyone entertain any serious doubt that if we made it clear that we would not be part of the eurozone there would not be a reduction in net investment? Can even my noble friend doubt that that would happen?